Management Accounting Job Order Costing Management Accounting

Process costing Used when a company uses many units of a single item Think of our example from yesterday (Chairs/Tables) Unit Product Cost (Total Cost) = Total Manufacturing Costs (Fixed + Variable or Direct + Indirect) Divided by (/) Total Units Produced

Job Order Costing When a company makes more than one product each job needs to be analyzed separately Think of our second example of Product A and Product B Often the allocation of Overheads (Indirect or Fixed Costs) will differ between products, remember product A and Product B

Accounting for Jobs Generally each job will have its own Job Card (Job Cost Sheet/Job Bill) The Job Card will collect all of the costs, both Direct and Indirect Therefore you have to be able to measure all of the costs

Example Job Card Turn to page75 and you will see how a job card is set out At the top of the Job Card there is a lot of details about the Job’s point of reference Secondly there is a breakdown of all of the components of the costs, these are familiar to you I am sure. Finally there is a summary and a total for the cost of the whole job

Example Copy the format of the Job Card onto a piece of paper and enter this information The Job Number is 1234 The Department is Pressing The Item is a Saucepan The Date initiated is today The job is not completed yet And we don’t know yet about units completed

Direct Materials for our Saucepan The Saucepan requires a body made of steel and a lid made of glass and plastic Each saucepan requires $10 of steel Each Sauce pan requires $3 of glass Each Saucepan requires $1 of plastic Look at page 74 and you will see a Bill Of Materials

Completing a bill of Materials Copy beneath the Job Cost Sheet the format of the Bill Of Materials Requisition number is 5678 Date is today Job Number to be charged is 1234 Department is Pressing Enter the Data as required

Entering Data onto the Job Sheet Take the total Direct Material cost and enter this into the Job Cost Sheet

Measuring Direct Materials If you look on Page 74 you will see a Time Ticket (Time Sheet) Copy this format onto a piece of paper Time ticket number is 159 Date is today Employee is Tim Skyrme Station is Lectern

Direct Labor Ctd I take 3 hours to make the Steel into a pan I take one hour to mould the plastic I take a further half hour to attach the plastic to the glass I am paid $3 an hour Enter this information into the Time Ticket

Enter this Data onto the Job Sheet

Apply the Manufacturing Overheads To allocate overheads we must choose an allocation basis Remember what we did with floor space and machine hours yesterday with our tables and chairs This time we are going to use a Predetermined Overhead Rate

Predetermined Overhead Rate Our Company has predicted that total Fixed Costs (Indirect Costs) are going to be $100,000 for the year It has also predicted that in total there are going to be 50,000 labor hours in the year Therefore it has set its Predetermined Overhead Rate at …….. $2 per hour

Calculating the Indirect Costs We know that our Predetermined Overhead rate is $2 per hour worked Therefore we simply multiply this by the hours worked to produce the Cost Object Enter this now on the Job Sheet

Complete the Job Cost Sheet

Problems with the application of Overheads The information used to calculate the Predetermined Rate is an Estimation Overheads are not easy to predict and as such they are either Underapplied OR Overapplied

An Example Two Companies A Plc and B Plc Both make the same product but A Plc calculates its Predetermined Overhead Rate according to Labor Hours, B Plc calculates according to Machine Hours

A PLC B PLC Actual Manufacturing Overheads = $50,000 Basis of Allocation = $5 per machine Hour Actual Machine Hours 10,500 Overapplication of $2500 Actual Manufacturing Overheads = $50,000 Basis of Allocation = 130% of Direct Materials Actual Direct Materials $30,000 Under Application of $11,000

Reasons for Over or Under Application Costs are often difficult to predict The setting or prediction of costs is known as Budgeting Budgeting is something we are going to come on to in to in later lectures

Standard Costs When we attribute Direct and Indirect (Fixed and Variable Costs) we assume that these costs remain the same Think Back to what we learnt about cost behavior Often Fixed Costs are not flat, they are stepped, Often Variable Costs are not linear, there are economies of scale, or diseconomies of scale

Tutorial We are going to do some Job Costings and then we are going to look at some variances and discuss how we can find out why and where these happened Variance Analysis is an important job for the management accountant